RECENT DEVELOPMENT OF MARITIME LOGISTICS
2. Liner Shipping 1. Container liners1.Container liners
June 14, 2011 11:57 9in x 6in Advances in Maritime Logistics & Supply . . . b1185-ch02
54 L. H. Lee et al.
trend towards larger vessels is much clearer. In 2008, the average size of new container ships entering service is 3489 TEU, an increase from 3291 TEU in 2007. On 31 October 2009, there were 218 new 2009-built fully cellular container ships in service with average carrying capacity of 4,125 TEU.(3)
Another trend in the world cellular fleet is the trend towards more gearless vessels. Among 2008-built container ships, nearly 80 percent of vessels and 90 percent of TEU capacity are gearless, comparing to only about half of the vessels built 10 years ago. This is also because of the development in port facilities, since more and more ports are equipped with modern handling equipment, especially specialized gantry cranes. The trend towards gearless vessels is likely to encourage ports to invest further in port handling equipment.(3)
2. Liner Shipping
three Japanese carriers NYK, MOL and “K” Line have decided to reduce their exposure to the volatile liner trade as part of a long term corporate strategy shift. According to AXS Alphaliner, seven major Asian operators have disposed of a combined 165 vessels totalling 282,000 TEU in the past 15 months. This includes 155,000 TEU sent for scrap and 127,000 TEU in secondhand sales.
Maersk Line maintained its dominance as the market leader in Jan 2010, but lost ground to second-ranked MSC in market share in terms of fleet capacity. Maersk’s share dropped from 16 percent in 2007 to 15 percent in 2010 while MSC’s share increased from 10 to 11 percent in the same period. However, almost all of the top 20 liner companies experienced mas- sive reductions in their profits, with Hapag-Lloyd being the only exception.
2.1.2. Increase in liner ship size
The size of container ships has been increasing steadily over the past three decades, as shown in Fig. 4. In 1975, the largest container ship had a capacity of 3,000 TEU. In 1991, that increased to 4,000 TEU and 6,800 TEU in early 2000. Most recently in 2009, container ships with capacity of up to 14,000 TEU have been pushed into service. The vast majority of these ships are used on the Asia-North America and the Asia-Europe routes, which offer the optimum combination of high volumes, long voyages and deep, efficient ports. The construction of wider locks at the Panama
Fig. 4 Trend in Largest Container Vessels.
Source: Historical series compiled from Containerisation International, various years
June 14, 2011 11:57 9in x 6in Advances in Maritime Logistics & Supply . . . b1185-ch02
56 L. H. Lee et al.
Canal, which is expected to be complete by 2014, will provide carriers with additional options for deploying their super-sized container ships. The wider locks will be able to accommodate “New Panamax” ships of about 12,500 TEU, compared with the current Panamax capacity of about 5,000 TEU.
High-volume container ships can provide significant cost savings to liner companies because of the economies of scale in major trade lanes. A 12,000- TEU ship can be operated with the same 13 or 14 crewmembers required by a ship with half the capacity. Per-unit costs of capital investment and fuel consumption are substantially less than for two vessels of half the size. It is thus no surprise that large container ships also dominate the order books, with ships of capacity over 7,000 TEU making up 58 percent of the current capacity on order. 30 percent of the order book is comprised of 128 vessels of 12,000 TEU and above. In combination with the growth in the number of container ships worldwide, this trend represents a very significant increase in global container shipping capacity.
The increase in size of container ships has also lead to more hub-and- spoke structures in the global shipping network. This is because of the fact that only several major trade lanes have sufficient demand to support these mega vessels. Furthermore, the mega vessels can only dock in a small number of ports because of their deep drafts. It is thus natural for carriers to adopt a hub-and-spoke network structure in order to take advantage of the economies of scale by consolidating the demand from smaller trade lanes and ports. Consequently, the demand for transshipment operation has also increased due to the shift towards larger vessels.
Not all liner companies, however, are convinced that the trend towards increasing container ship sizes is healthy for the market. Evergreen has decided not to include any of these mega-containerships in their recent order for 100 new container vessels. Evergreen’s order enables them to take advantage of the drop in newbuilding prices amidst the current oversupply in shipping capacity, but Evergreen chairman Chang Yung-Fa had previously expressed reservations on the market impact of such high- volume vessels, which are unable to take advantage of their economies of scale unless they are constantly full. With the current depressed global economy, it remains to be seen whether the trend of liners increasing their ship sizes will continue.
2.1.3. Liner productivity
Due to the high cost of assets such as container ships, liner companies are naturally concerned about liner productivity, which measures the utilization
of such expensive assets. Unfortunately, the productivity of the world’s shipping fleet in terms of ton-miles per deadweight-ton (dwt) has been decreasing since 2005 and is expected to decline further. By 2008, liner productivity had fallen to levels only 6 percent higher than those in 1990.
The decrease is due to a combination of many factors, most notably the oversupply of tonnage coupled with the decrease in trade growth. In 2009, the size of the world’s container fleet was estimated to grow by 9.6% in contrast with a drop in demand of 9.1%. The cargo volumes carried by the world residual fleet, including container ships and general cargo carriers, dropped from 10.84 to 10.4 tons per dwt.(3)
Furthermore, liner companies have introduced various cost saving mea- sures which further decrease liner productivity. Previously, liner companies introduced slow steaming in order to reduce fuel costs. With the recent decline in fuel prices, liner companies have also taken to choosing longer but cheaper routes, which has also resulted in fewer ton-miles per dwt.
On the other hand, these longer routes, e.g. bypassing the Suez Canal via the Cape of Good Hope, can result in significant cost savings (up to $300,000 in some cases for the largest ship) even after considering additional fuel and crew costs, mainly due to savings on canal transit fees.
Such rerouting also bypasses the hotspot for piracy near Somalia, which presents additional cost savings for insurance. It is also a good measure to absorb additional capacity, since such rerouting will increase the average sailing time by approximately 7 days. However, the viability of the reroute strategy relies on the current relatively low bunker prices. The long-term applicability of such strategies could come into question when bunker prices increase.
2.2. Freight rates
Liner companies have been hit hard by the sharp decline in freight rates since the start of the economic crisis. Freight rates for most vessels plummeted due to the decrease in shipping volumes, with April 2009 rates dipping below the levels experienced in 2000. Container volumes on the Asia-Europe route fell by around 15 percent in 2008. This contributed to a severe drop in freight rates in early 2009 to about $300 per TEU, a decline of 80% from the peak in 2007.(3)
Furthermore, in 2008 the European Union repealed the block exemption that had previously been granted to liner conferences with regards to price
June 14, 2011 11:57 9in x 6in Advances in Maritime Logistics & Supply . . . b1185-ch02
58 L. H. Lee et al.
and capacity setting. This resulted in the former members of the Far East Freight Conference having to set their own tariffs and surcharges since 18 October 2008, presenting an additional burden to shippers in having to keep track of the multitude of different rates. The first quarter of 2009 saw a corresponding decrease in trade volumes on major routes to and from Europe. The Europe-Asia route declined by 22 percent on the westbound route from Asia, and the eastbound route from Asia experienced a 17 percent decline at the same time. The transatlantic westbound route to North America also experienced a 17 percent decline, while the eastbound route from North America to Europe dropped by 30 percent.
However, great improvements in freight rates can be seen recently due to recovering demand with the peak season and great efforts from liners in maintaining freight rate increases despite heavy competition. Transpacific freight volumes have increased 13% year-on-year in the first quarter of 2010, with corresponding freight rate increases to $2,607 per FEU compared to pre-crisis levels of $2,000 per FEU.
Such recovery does not come without cost, however. Shippers are becoming increasingly unhappy about sharp increases in rates, in addition to service changes such as slow-steaming which increase shipping time.
Furthermore, it is unclear if the recovery in shipping volumes is sustainable rather than simply a case of retailers restocking inventory. A deterioration in volumes, combined with an expected wave of new containership deliveries (410,000 TEU in Q2 2010), may undermine the recovery potential in freight rates. Some shippers have proposed holding regular pricing discussions with liners in an effort to prevent seeing such sharp swings in freight rates, which also add uncertainty to shippers’ supply costs. Liner companies, on the other hand, have also expressed concerns about regular communication and cooperation with shippers to reduce costs and conflicts on both sides.